ALEX BRUMMER: Traders shrug off the dismay after Moody's downgrade

After the Lord Mayor’s Show of the Moody’s downgrade of Britain’s AAA credit rating we have the reality check.

Despite all those weekend headlines and the drama of George Osborne being called to the dispatch box of the House of Commons, very little has changed.

The immediate market reaction has been negligible. There was a bit more slippage of the pound against the dollar and the euro in early trade. But it was up against both currencies last night with fears about a middle outcome in the Italian elections dominating trading. As for the FTSE 100, it effortlessly continued its rise.

Negligible: The downgrade was greeted with a shrug of the shoulders in the City of London

The downgrade may be politically embarrassing for 72 hours or so but it has been clear for some time that the Coalition’s plans for dealing with Britain’s borrowing and debt are off-course and borrowing is at least £35billion higher than forecast in 2010.

There will be concern the upgrade will lead bond yields to rise, leading eventually to a broader rise in money costs. Evidence from the United States and France suggests that in current sluggish growth conditions, a real normalisation of interest rates is some way off.

More...

In fact the Bank of England has the tools, in the shape of further quantitative easing or Funding for Lending, to head this off at the pass.

The more serious concern is a punishing ride for sterling. But we should not forget that having our own exchange rate is an advantage that our neighbours in euroland do not have. It allows our currency to devalue without imposing savage real cuts on domestic labour costs.

The main mechanism for that will be the squeeze on household incomes that comes with rising imported prices.

This raises the question as to what are the credit rating agencies for. The assessment of the ratings agencies on toxic sub-prime debt was so wrong to be laughable. They contributed to the euro crisis with their frequent changes in the ratings of bonds in the eurozone and now have simply stated the obvious in UK terms.

In the light of the massive task Britain has in restoring the public finances, the downgrade must be regarded as no more than a blip.

Perpetual change

The arrival of John Fallon at Pearson signifies another revolution. His predecessor Dame Marjorie Scardino transformed an odd conglomerate, that had interests in everything from investment banking to Madame Tussauds, into an education and publishing powerhouse.

Fallon’s task is to speed the exit from paper textbooks and testing, much of it in its American operations, and lead a digital revolution. Cleaning up the current operations is an expensive business that will cost the company £200million between now and 2015. It is clearly a bigger number than the market expected as a 3.7 per cent drop in the Pearson share prices shows.

There are two strands to Fallon’s revolution. The first is to turn as much of its analogue operations into digital, allowing one-to-one tuition in American colleges and such like.

The second is to follow the likes of Diageo and Vodafone by spending big on expansion in the new wealth-creating economies with ambitious targets to lift the share of income from these sources to at least 25 per cent.

There will, however, be a huge sigh of relief at the FT which is successfully making the transformation online behind a profitable paywall and is unlikely to be sold.

Fallon believes the FT’s knowledge base can be leveraged in places like China where it is already being used as a learning tool.

Scardino was given the luxury of time to engineer her new chapter.Fallon will need to keep investors fully in the loop if he is to achieve the same.

Virtue’s rewards

Much of the attention on Mark Carney’s arrival at the Bank of England has been on what he may decide to do about steering the economy.

So it has been easy to forget that the Bank he inherits will also be the supreme regulator of the financial system.

Carney clearly believes that no amount of supervision can ensure ‘good conduct’.

Instead it is going to require cultural change with the rediscovery of ‘core values’ that require individual responsibility.

As the governor of the Bank of Canada notes, the tougher capital rules of Basle III should help, along with less reliance on ratings agencies and better market infrastructure.

But ‘virtue cannot be regulated’.

His comments should be helpful to Antony Jenkins, the chief executive of Barclays, among others, who is seeking to shake up the bank’s ethics after the lack of sobriety in the John Varley-Bob Diamond era.

Whether the better behaviour can be made to stick over the long haul is questionable.